Drugs, Your Brain, and Holiday Sales

 

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Please Click "Display Images" in Your Email ProgramAh, the holidays. Tis’ the season when millions of Americans swarm upon stores across the nation.

And tis’ the season when stores respond to this demand surge by dropping prices.

Wait a minute … What? Why?

If demand spikes and supply stays (mostly) the same, prices should rise instead of fall. Right?

Just humor me for a moment:

Imagine that you own a retail store. You get about 50 customers each week. But you know 100 shoppers will descend upon your store next week, clamoring to buy your goods.

“Sweet!,” you think.

But wait … It gets better.

These aren’t leisurely shoppers. These shoppers have a tight “deadline” – December 25 – by when they must make the purchase. They’re time-crunched, they’re stressed, and darn it, it’s cold outside.

These 100 buyers, in other words, are ready, willing and able to whip out their wallets and finalize the deal. Now.

Furthermore, you know, based on previous years, that this batch of 100 customers won’t stick around as regulars. By January, you’ll be back to your regular 50 customers per week again.

Wouldn’t you be tempted to raise prices? Just a little bit?

I would.

Except that doesn’t happen. Instead, retailers respond to a surge in demand by dropping prices.

Why?

It’s not (just) to compete with other stores. That’s part of the reason. But that’s not the whole story.

Stores drop prices to create more demand.

Retailers understand a critical truth about human behavior: When people think they’re getting a great deal, they’ll make impulsive purchases.

Sure, you may need to buy presents during the holidays. But discounts and sales are trying to lure you into spending more than you otherwise would. Which means that if you want to save money, holiday sales may be your nemesis rather than your friend.

Neutral, Negative, and Positive Response

According to retail analysts, buyers have three types of responses to a store discount:

Neutral –

These customers would buy at any price point, regardless of whether the item is full-price or discounted. Brand loyalty trumps price.

Negative –

These customers react to cheap prices with skepticism. Their minds assign a higher “perceived value” to expensive products.

Have you ever heard someone say, “This $80 bottle of wine” as a shorthand method of communicating, “This good bottle of wine?” That’s the psychological phenomenon of conflating price with quality.

The adage “you get what you pay for” reflects consumer bias towards believing that higher-priced items must necessarily offer better quality. In these customer’s minds, if you discount the price of an item, you also discount its value.

But there’s a third category of consumers …

Positive –

These customers are impulsive. They love the “thrill of a deal,” and discounts and coupons trigger them to purchase items they otherwise wouldn’t buy.

Discounts, coupons, and clearance deals are like crack to an impulsive shopper. They enjoy the irresistible “high” of scoring a great deal.

That “high” leads to spending more money, not less.

By the way, I’m not using the crack analogy lightly. When we’re presented with a sale, discount or deal, our brains are flooded with the same chemicals that may assist in forming addictions. Read on …

Happy Chemicals

Why do we love sales so much?

Our brains are hardwired to feel “happiness” – in the form of a chemical called dopamine – when we encounter novelty (shopping for new items) and when we think we’ve scored a big win (finding a great deal).

As this CBS News report says:

“During a shopping experience, the human brain … releases the chemical dopamine … which has a role in our ability to experience pleasure or pain. It appears also to have a role in addictive behavior.”

This rush intensifies when people are presented with a “sale,” which causes our brain to light up as though it’s received a reward.

“Dopamine is … always triggered when we see a sale sign,” Mark Ellwood, author of the book Bargain Fever, told KARE 11 News in Minneapolis. (Ellwood refers to dopamine as “buy-agra,” which I think is hilarious.)

Sales, discounts, coupons and deals use the principals of human psychology to coerce consumers to spend more, not less.

“Look, I scored this Xbox 360 for 40 percent off!” – Says dopamine-fueled brain.

“Were you planning on buying one?” – Says rational brain.

“Well, no …” – (Rational brain, you’re such a buzzkill!)

Stores aren’t discounting items out of the generosity of their hearts. They’re dropping prices to boost sales. Plain and simple.

But Does The Math Work Out?

Let’s crunch a few numbers.

Imagine that you own a store. You only sell one item, which is priced at $100. Your overhead and expenses equal $70 per item.

During the holidays, you have two options:

Option A: You can sell at full-price to 100 people. Your overhead stays the same.

Option B: You can sell at a 20 percent discount to 500 people. However, your overhead rises to accommodate that additional sales volume. You need to employ extra staff, keep the lights on longer, and handle more customer service inquiries. This increases your overhead by 5 percent, which is an additional $3.50 per item.

If You Choose Option A: (Sell for $100 to 100 people with overhead of $70 per item)

$10,000 revenue
$7,000 expense
$3,000 profit

If You Choose Option B: (Sell for $80 to 500 people with the added overhead of $73.50 per item)

$40,000 revenue
$36,750 expense
$3,250 profit

You’ve boosted your profits by 8.3 percent by offering shoppers a discount.

****
But here’s the catch:

If you run these numbers with anything less than 5x the sales volume, the retailer loses money by offering the discount. If only 4x as many people shop, for example, the retailer loses money on the deal.

Beware of Steep Discounts and DealsOnce the sales volume climbs to 5x or higher, the retailer makes mouthwatering profits.

So here’s the (literally) million-dollar question: Can a retailer get 5 times as many customers to swipe their credit cards by tempting them with a holiday discount?

In a word: Yes. (At least, the successful retailers can.)

More than half of the adult U.S. population shopped on Black Friday this year. More than half.

There are 240 million American adults, according to the U.S. Census Bureau, 141 million of whom whipped out their wallets for Black Friday deals.

That’s 58 percent of the U.S. adult population.

That’s astounding.

Holiday season sales account for up to 40 percent of U.S. retailers’ annual revenue, according to this New York Times report.

This phenomenon doesn’t just happen in the U.S.

In 2012, several department stores in Brazil more than doubled their annual revenue by rolling out “deals and discounts” coinciding with Black Friday (despite the fact that there’s no Thanksgiving holiday in Brazil).

The bottom line: Discounts motivate people to flock to the stores and spend more money.

No wonder retailers enjoy heavily discounting their items every Christmas. (And every President’s Day, Memorial Day, Labor Day, and every other holiday when people congregate at malls or on shopping websites.)

How to Save 100 Percent – This Week Only!

I shock a lot of people when I tell them that Afford Anything is a money-blog that doesn’t promote clipping coupons or scoring hot deals.

I don’t believe in encouraging rampant deal-chasing.

Sure, I’ll use Groupon as much as the next person. But 9 times out of 10, I’m using it impulsively to buy junk I don’t need.

“Whoa, 50 percent off a cucumber-coffee grounds facial?! Score!”

Frugality is an extension of a consumer mindset. If you’re thinking about scoring hot deals, your mental focus is on buying stuff – not on boosting your net worth and benefitting the world.

Sure, you’re finding discounts and deals. But you’re still a spender. You’ll save 30 percent by purchasing the item on sale, but you’ll save 100 percent by avoiding the purchase in the first place. Think like a creator, not a consumer.

The key to saving money isn’t chasing deals or discounts. It’s curbing your impulsive spending.

Staying out of stores (and away from online shopping) is the single most effective way to curb that impulse.

So avoid the sales and beware of steep holiday discounts — especially if you’re trying to build your savings or pay down debt. Those sales might be more dangerous to your bank account than you realize.




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17 Responses to “Drugs, Your Brain, and Holiday Sales”

  1. Renee s
    06. Dec, 2013 at 7:57 am #

    Love the post, as always! This is the reason why I stay away from ads as much as I can because I know that I can get sucked in. Also, the cucumber coffee grounds facial sounds like a great idea..haha

    • Afford Anything
      06. Dec, 2013 at 10:57 am #

      Haha! When I wrote that line, I thought: “I bet someone will comment on this right away.” Sure enough, the first comment mentioned it!! :-)

  2. Done by Forty
    06. Dec, 2013 at 9:19 am #

    This is my favorite “Black Friday” post of the year. Thanks so much. I often try to articulate the risks of sale items, shopping portals, & CC rewards: basically anything that gets the consumer to think he or she is pulling one over on the retailers. But you’ve written it so much better than I could. :)

    Thanks again!

    • Afford Anything
      06. Dec, 2013 at 10:55 am #

      @Done by Forty — Thanks!! I’ve also tried to articulate this during conversations, but I find it easier to explain in writing, when the facts and figures are at my fingertips. Now I’ll just refer people to this whenever I’m trying to explain why sales aren’t as much of a cost-saving mechanism as people think. :-)

  3. Carrie
    06. Dec, 2013 at 12:36 pm #

    Great post! Buy-agra is right. I had to learn the hard way that buying something you don’t need, even if it’s on sale, is still a waste of money.

    • Afford Anything
      06. Dec, 2013 at 12:54 pm #

      @Carrie — I love the term “buy-agra.” :-) And I’ve had to learn that lesson the hard way, as well. Groupon used to be a huge weakness of mine, before I realized that it actually increased my total spending.

  4. FuggingDebt
    06. Dec, 2013 at 12:46 pm #

    I really needed to read this today. I have been looking for a larger tv because… I just want a bigger tv! Two things are wrong with this purchase. 1)I rarely watch tv anymore and 2) The tv I have works just fine.

    So instead of spending >$500 on a tv I will barely use, I will instead use that to help pay down my debt or invest with. Something about this time of year makes me want to buy myself something nice while taking care of my XMAS shopping. I’m on a path to increasing my net worth and this would have slowed me down. Great article!

    • Afford Anything
      06. Dec, 2013 at 12:51 pm #

      That’s awesome!! Yes, use that $500 to either pay down your debt or invest. Then make a mental shift into thinking of that $500 improvement in your net worth as the BEST present you could have ever “bought” yourself. :-)

  5. Sanjeeb Sapkota
    06. Dec, 2013 at 1:11 pm #

    Your post is engaging and pleasant in reading, as always. Serotonin is another chemical that has regulations on happiness and mood, besides dopamine.

    • Afford Anything
      07. Dec, 2013 at 3:41 pm #

      Dopamine, serotonin and oxytocin all affect the mood, but in different ways. Dopamine specifically impacts the section of our brain that lights up at rewards, and that shows the most activity during shopping/sales.

  6. Deia @ Nomad Wallet
    08. Dec, 2013 at 5:18 am #

    “Buy-agra” is hilarious! I save up on so many other things the rest of the year and I only indulge during the holiday sales. To minimize the risk of impulse spending, I go in with a spending limit. I also only buy Groupon when I need a haircut or for eating out. I don’t mind the retailers making more money as long as I don’t spend more money than I intend to. It’s all about being thoughtful about how I spend my money.

  7. Deia @ Nomad Wallet
    08. Dec, 2013 at 5:19 am #

    Or maybe that’s just my dopamine addiction talking. ;)

  8. Betsy @ ConsumerFu.com
    08. Dec, 2013 at 6:25 pm #

    Funny thing…I resisted an impulse purchase during the back-to-school sales…and I’m talking an under $10 purchase. The exact item is back on sale for the same price. Now I actually need the item, so I picked it up. It has taken years, but I have mastered the fear of missing out. If I’m out and tempted I just put it in my cart and walk around the store a minute…usually wind up putting the amazing, fantastic, I-can’t-live-without it item right back.

    • Afford Anything
      09. Dec, 2013 at 3:57 pm #

      @Betsy — I think you articulated it beautifully when you said that you’ve “mastered the fear of missing out.” Retailers love to instill that fear within us, which is why sales are “limited time!” and “today only!” and “don’t miss out!” Once we can overcome the fear of missing out, though, we find that we actually gain more by not filling our lives with junk. :-)

  9. Money Saving
    10. Dec, 2013 at 12:53 pm #

    AA,

    I couldn’t agree with you more on this topic. The trick to really saving is to stay out of the stores altogether. We don’t need 95% of the crap that a normal person purchases.

    Sales are just a gimmick to push more product, plain and simple :-)

  10. Sandy
    26. Dec, 2013 at 2:14 pm #

    Take a while to get de-programmed from being a shopper to a saver. If we all stepped away from whatever it was that we wanted to buy and thought about the purchase for a day or two I bet that people would spend a lot less.

    I’m at the point now where I spend when I NEED something (and separating wants from needs is another biggie) or when one little thing (like a latte dammit) makes the day that much more special.

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